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Bengaluru foray off to a promising start

Delivers a healthy P&L performance

* Macrotech Developers (LODHA) achieved sales of INR34b (7% below our estimate), up 12% YoY but down 4% QoQ. Pre-sales for 9MFY24 stood at INR103b, up 14% YoY. The residential business generated bookings of INR32b in 3Q (up 5% YoY) and INR99b in 9MFY24 (up 16% YoY).

* Sales volumes for 3Q rose 4% YoY to 2.6msf. Blended realization was flat YoY but declined 8% QoQ due to lower contributions from the South and Central Mumbai projects.

* Its first project in Bengaluru fetched a strong response, as 80% of the inventory was sold within the first week. It contributed INR6.6b to the overall sales. The realization was also superior at INR12k/sf vs. INR8-9k/sf prevailing in the micro-market

* LODHA reported its highest-ever revenue of INR29.3b, up 65% YoY/68% QoQ and in line with our estimate. EBITDA (excluding other income) jumped 116% YoY/112% QoQ to INR8.8b, as margin improved 700bp YoY/600bp QoQ to 30%. LODHA exited the UK business and recognized an exceptional loss of INR1b, and hence, PAT growth moderated 25% YoY to INR5b.

Net debt flat sequentially; full-year BD guidance achieved

* Collections were flat YoY at INR26b and OCF stood at INR10b (excluding proceeds from the UK), down 28% YoY/18% QoQ.

* During the quarter, LODHA acquired three new projects in South & Central Mumbai, with a cumulative GDV of INR60b. During 9MFY24, the company achieved a BD of INR203b – higher than the full-year guidance of INR175b.

* LODHA generated INR14b of surplus cash, which was largely utilized for new project acquisitions. Hence, net debt was flat QoQ at INR67.5b, with a net D/E of 0.5x. With significant investments towards BD already done, management reiterated its guidance of reducing debt levels to 1x of OCF by FY24-end.

Palava set to benefit from the improving infrastructure

* The operationalization of key infrastructure projects will significantly improve the attractiveness of Palava as a residential and warehousing destination.

* In 3QFY24, the company concluded a land transaction at the highest-ever realizationof INR65m/acre – higher by 2.5x since CY21, and management believes it will gradually increase to INR100m/acre.

* From FY25E, LODHA plans to launch premium projects at Palava as the ecosystem is now ready, and hence, while the LfL price growth will remain below wage growth, the overall realization improvement in Palava will be higher due to the offering of premium projects going forward.

* The company is aiming to generate sales of USD1b+ over the next few years vs. its current run-rate of INR30b.

Key concall highlights

* Fund Raise: LODHA’s current cash flow run-rate and the B/S strength are sufficient to achieve its targeted growth over the medium term. However, if any inorganic opportunities arise that complement the internal growth targets, it is prudent to raise the required capital to capture the same. Hence, the Board has passed an enabling resolution to raise equity capital of up to INR50b.

* Funds will only be raised if it comes across opportunity, which will enable it to grow beyond the targeted growth rate of 20% or if it improves the longevity of growth that the company can deliver.

* Bengaluru: Preference for premium housing has been growing at a rapid pace in the city, as the share of homes with INR15m+ ticket size is at 25% currently vs. 10% a few years back.

* LODHA will continue to focus on premium and luxury segments and is targeting to achieve INR30-35b annual sales over the next few years.

* Annuity business: The avenues for rental income are FMS business, the Warehousing/logistics business, and selective office/retail assets. The rental income would be INR15b by FY30E – 25% will be from FMS, 30% from warehousing and balance from office/retail.

Valuation and view: on track to deliver consistent performance; retain BUY

* We trim our FY24E bookings by 5% to factor in lower-than-expected bookings in 3Q. With a strong launch pipeline of 4.4msf worth INR63b for 4QFY24, LODHA remains on track to achieve its annual bookings guidance of INR145b.

* Overall, LODHA has been delivering a steady performance across its key parameters of pre-sales, cash flows, business development, profitability, and return ratios over the last two years. As it prepares itself to capitalize on the strong growth and consolidation opportunities, we expect this consistency in operational performance to continue.

* Further, its low leverage of 0.5x of equity can provide firepower to target aggressive growth given an opportunity. Our terminal growth rate of 5% in our DCF-based methodology is the least it can achieve in the long term, leaving further headroom for re-rating.

* Reiterate BUY with an unchanged TP of INR1,295, indicating 25% upside potential.

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SEBI Registration number is INH000000412